UAE banking indicators show solid growth signs

The UAE banking sector is treading its way to solid growth, banking indicators from the central bank and other government and private financial agencies show.

Advances-to-deposit ratio (ADR), the difference between loans that banks have lent and their deposit base, has narrowed considerably as the ratio fell to 104.4 per cent in September from 109.9 per cent in January.

The loan-deposit gap went down to Dh43.5 billion from Dh90bn in January.

This is still above the 100 levels required by the Central Bank but is an indication that the gap is narrowing considerably in a short space of time, said Dubai Chamber in its economic note. "This is clear evidence that the prescribed level of the UAE Central Bank loan-to-deposit ratio of 100 per cent is becoming a reachable target," it said. "On the whole, the banking sector is emerging in better shape in the months ahead with the outlook remaining upbeat."

Deposits grew every month since the turn of the year bar June and now stand for the first time above Dh1.5 trillion.

"People have been very careful with their surplus cash flow and they are sticking to it," Simon Johnson, Regional Head of Commercial Banking at HSBC Middle East, told Emirates Business. "Customers are telling me that they see opportunities as confidence begins to turn around – to make acquisitions, to invest in the region and internationally so yes, most prudent customers are saving at the moment."

The value of loans and advances has also expanded proving that even during the midst of the slowdown and widespread risk aversion, banks were continuing to lend. Loans and advances increased by 2.5 per cent from Dh995.7bn in January to Dh1.021trn by September-end. But loan growth has significantly fallen compared to the levels seen in 2007 and first half of 2008.

"It is fair to say that demand has reduced if you look at the past 12 months because customers like any good family is busy drawing in their belts. Therefore, we saw across the board less advances within all the banks," Johnson said.

John Coverdale, Global Co-Head of Commercial Banking, HSBC, said contraction in advances is natural. "We would expect people to repay loans so if there is lower demand out there you cannot replace them as quickly," he said.

Thanks to a slowdown in loan growth compounded with the fact that the government has extended significant support through its deposits, liquidity has improved.

The LTD ratio may have fallen short from the requirement but most banks remain below the loans-to-stable resources limit, which the central bank uses to gauge a bank's liquidity, HC Securities said.

Stable resources refer to all forms of long-term (stable) funding and not just deposits. Banks are also required to maintain this ratio at 1:1. Stable resources, as computed by the central bank, include interbank deposits with maturity of more than six months, customer deposits, subordinated loans and free own funds.

The one-month Emirates interbank offered rate (Eibor) that peaked at more than 4.6 per cent back in October 2008 has also fallen considerably since then and the latest figures from the Central Bank suggest that interbank lending rates have fallen to 1.5 per cent in October.

"This significant easing reflects the improvement in market sentiment over the past few months and the strong appetite of banks to start lending to each other and some observers have suggested that this trend is likely to continue throughout the remainder of this year," Dubai Chamber said.

To further improve the liquidity of the banking system, the UAE Central Bank has announced a slew of measures, one of which is to set up a new mechanism to determine the Eibor to reflect the true conditions of the market.

According to the Central Bank, the Eibor is relatively high when compared to the repurchase (repo) rate, which is at one per cent. But the reduction in interbank rates is unlikely to make a significant change in the tight funding environment or lending activities, HC Securities said.

"Since most of the banks are already pricing their loan portfolios based on an internal base rate, reduction in Eibor is not likely to be passed on to customers. Actually, banks will demand a higher premium to lend to customers when economic conditions are not conducive," it said.

John Calverly, Head of Research, North America at Standard Chartered, said government fiscal stimulus is still not being translated to increase lending in the private sector.

This is because banks remain constrained in terms of capital and due to ongoing calls to increase bank capital requirements. Banks, Calverly said, are more likely to shrink their balance sheet rather than seek fresh capital.

Philippe Dauba-Pantacce, Senior Economist for Standard Chartered, said tight lending is not necessarily just a case of loan-to-deposit imbalance.

"In Saudi Arabia, the ratio is lower than 100 per cent but consumer confidence is low," he said. To lower the cost of funding and therefore increase activity in loans, the UAE Central Bank on August 31 reduced the interest rate charged on the liquidity facility to 1.5 per cent from 2.5 per cent.

On September 1, it cut the minimum Tier I capital ratio to seven per cent and the overall capital adequacy ratio to 11 per cent. Banks were also required to increase Tier I ratio to eight per cent by June 30 next year.

These measures were cautiously welcomed by analysts. With regard to the former, some bankers said banks are unlikely to use such facility because of the short-term feature of this facility (less than three months), which disqualifies it from being classified as stable resources.

Banks cannot depend on short-term facilities to fund their lending activities when they are already facing problems from the maturity mismatch in their balance sheets.

As for the latter, the move seemed paradoxical as banks across the globe are expected to move towards higher capital base to protect against unexpected losses.

It is also not expected the banks that already raised their Tier I capital base to reverse it in light of the new capital requirement. Though this would help the banks in terms of funding costs, it is not expected that it will boost credit expansion in the near term.

Despite criticisms, the International Monetary Fund has hailed the efforts of the UAE Government, especially that of the Central Bank for handling the crisis well.

Dr Masood Ahmed, IMF's Director for Middle East and Central Asia Department, said economic conditions have been improving in the UAE, thanks to its countercyclical policies and government liquidity assistance.

IMF figures show that non-performing loans in the country have gone down from 2.9 per cent in 2007 to 2.5 per cent; capital adequacy increase from 14 to 17.6 per cent; while return on assets increase from two to 2.3 per cent.

He said the oil shock and financing stress led to an economic slowdown but the UAE, along with other GCC states, have faced the global crisis from a "position of strength". "For the past few years, the governments have been decreasing their debts while they built up their reserves," he said. "From the IMF point of view it was a very sensible thing to do. They saved for the rainy days and it is rainy day today."

Ahmed said NPLs are in the region range from two to 3.5 per cent, levels which are significantly lower than other regions.

In addition to positive movements in the banking sector, conditions in the financial markets have also improved in recent months.

The Dubai Financial Market Index has witnessed a 28.1 per cent rise since January to date, and the Abu Dhabi Securities Exchange rising by 24.9 per cent over the same period.

"This suggests that the difficulties that were faced in the market are now clearly over with the stage now clear for a strong recovery going forward," Dubai Chamber said.

"It is clear that the easing of liquidity conditions, cheap asset prices as well as improved market sentiment is expected to drive the UAE stock markets in the months ahead," it added.

According to the Boston Consulting Group's (BCG) Middle East Banking Performance Index, UAE banks have seen the strongest growth in the GCC in terms of retail banking revenues.

Although banks here have only seen one per cent growth in group profits, they collectively lead the region's retail banking performance with a 34 per cent increase in revenue from last year, 25 percentage points higher than the GCC industry average of nine per cent.

The country's overall revenue is however expected to dip due to a considerable increase on loan loss provisions. The index shows UAE provisions went up by 225 per cent to 2.1 per cent from .7 per cent in 2008.

Both retail and corporate loan books were scathed by the economic environment thus higher NPLs. Another factor is the real estate exposure of the UAE banks as most of them are leveraged to the UAE real estate market in some form or other.

The banks have real estate subsidiaries, associates and lending portfolios to real estate companies. These factors have led to the sharp increase in NPLs and thus provisioning levels. The troubled Saudi groups, Algosaibi and Saad, aggravated the losses.

But analysts argue that this is manageable and is lower compared to developed countries. Banks currently are optimistic and generally upbeat about the sector's ability to bounce back from the current downturn, Dubai Chamber said.

A recent survey of banking leaders in Dubai and Abu Dhabi revealed that over half of those questioned believed that interbank lending rates will continue to fall in the coming months with more than 75 per cent suggesting that banks on a whole will make a profit in 2009. Some banks are in the moderate expansionary mode. From December last year until September, bank branches have increased by seven per cent with an addition of 43 branches in the period. Electronic banking units rose by 16 per cent from 95 by the end of December to 110 by September-end, data from the Central bank showed.

Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.

Follow Emirates 24|7 on Google News.